HEARTLAND SNAPSHOT, NOVEMBER 2008

Cincinnati Retail Market

Slower, but steady is an accurate description of the state of the retail market in greater Cincinnati, a metropolitan statistical area of 2.14 million people in a region spanning Ohio, Kentucky and Indiana. The region boasts 10 Fortune 500 companies, ranking Cincinnati third nationally for the number of Fortune 500 companies per capita.  Those companies include retail giants Kroger and Macy’s, as well as Fifth Third Bank.

The Cincinnati economy comprises businesses from many sectors, giving it a very diverse economy that is less prone to the boom-and-bust cycles common in many industrial-based metro regions. Retail vacancy rates have remained relatively stable at approximately 11.4 percent; however, expected store closings, including four Linens ‘N Things locations, will move this figure up.

Additionally, the national housing slow down is being felt in the area, with the statistics almost mirroring that of the rest of the nation. According to the Ohio Association of Realtors, Cincinnati measures close to the state averages in 2008 in the decrease in the number of units sold (-15.7 percent) and in the decrease in the dollar volume of transfers (-21.9 percent); however, Cincinnati again this year leads the state in average home sale price at $167,689 — the number is down 5.2 percent from 2007, but better than the state average decrease of 7.4 percent.

As housing growth and consumer spending slows, retail development is following. New retail development for 2009 is expected to be sluggish in reaction to the weak economy, the recent events on Wall Street and the credit crisis. A few proposed projects have been dropped, while others have been delayed due to slow leasing activity. Delayed projects include two new Wal-Mart stores in Fairfax and Hamilton Township in Warren County, Ohio. Additionally, proposed Wal-Mart store sites in Cleves, Ohio, and Florence, Kentucky, have been dropped.

Nevertheless, not all is doom and gloom. Many projects continue to move forward with strong leasing activity, including Bear Creek Capital’s projects in Kenwood, Ohio, Newport, Kentucky, and South Lebanon, Ohio. Retailers at Bear Creek’s Kenwood Towne Place are set to begin opening prior to this holiday shopping season. Tenants will include Crate & Barrel, The Container Store, Ethan Allen, Borders Books & Music and LA Fitness. The project also includes Kroger’s foray into the high-end gourmet grocery segment, with the debut of its 75,700-square-foot Fresh Fare concept, which is designed to compete locally with Whole Foods and The Fresh Market.

Bear Creek’s Northern Kentucky project, Newport Pavilion, will be anchored by Target and Kroger Marketplace, which will be opening in the spring/summer of 2009. In South Lebanon, Bear Creek’s Pavilion at Rivers Crossing on State Road 48 has Kohl’s open, and Lowe’s Home Improvement Warehouse will open later this year, with Target following in the spring of 2009. Other properties under development include Nordstrom, which is under construction at General Growth Properties’ Kenwood Towne Centre and scheduled for a fall 2009 opening. The Cincinnati Premium Outlets in Monroe, Ohio, is also currently under construction.

Redevelopment of some well-known centers is also moving forward on schedule — Western Hills Plaza is adding Target and Surrey Square in Norwood, Ohio, will feature a relocated and expanded Kroger.

Expect specialty projects and lifestyle centers to be challenged in 2009, as more consumers direct spending towards discount and value-priced retail venues. The partnership between Atlanta-based Carter & Associates and the Harold A. Dawson Co. is working to deliver The Banks, a much-anticipated mixed-use development on downtown Cincinnati’s riverfront. Construction is moving forward though retail leasing activity may be slowed. The long delayed redevelopment at the northwest corner of Fifth and Race streets downtown is seeing new signs of life with the announcement that the Cincinnati Center City Development Corporation (3CDC) has agreed to take over the project. The 3CDC is a non-profit economic development group formed in 2003 to promote downtown Cincinnati. This group was also behind the successful $45 million redevelopment of downtown’s Fountain Square. The key Fifth and Race intersection is shared by Saks Fifth Avenue, Macy’s and the landmark Hilton Cincinnati Netherland Plaza Hotel.

With the slowing of housing growth, fewer new developments are moving forward in the outer suburbs. Two proposed projects at Interstate 75 and the Butler Regional Highway have certainly been affected. The two competing projects had been proposed by Steiner + Associates and Bear Creek Capital. Steiner + Associated has, in fact, dropped its plans and Bear Creek Capital appears unlikely to move forward in the near future.

The positive outcome is a greater number of urban infill projects such as Corryville Crossings near the University of Cincinnati campus and Jeffrey R. Anderson Real Estate’s Rookwood Exchange project in Norwood. Rookwood Exchange, which was proposed to start in early 2009, will be a dense, urban mixed-use development with up to 400,000 square feet of office, six to eight restaurants, a hotel, and a residential component with 150,000 to 200,000 square feet of retail and entertainment space.

The current economic downturn has put financially healthy tenants in the driver’s seat when negotiating with landlords. For the first time in many years, landlords are offering incentives, such as free rent and increased tenant improvement allowances. One national restaurant chain that is still in expansion mode is requiring anywhere from $1 million to $1.5 million in tenant improvement allowance before approving a site. Developers with the capital are not balking, given that full-service restaurant activity is at the slowest growth rate in years.

With new chains entering the market, expansion in the fast-casual and quick-service dining segments is still relatively robust. Fatburger is opening its first Cincinnati location in Oakley, Ohio, while Five Guys Burgers & Fries and Panda Express are actively searching for sites. Other active fast-casual restaurateurs include Noodles & Company, Qdoba Mexican Grill, Chipotle and Bruegger’s Bagels. Also active are Buffalo Wild Wings, Papa Murphy’s Take ‘n’ Bake Pizza, Sonic and Chick-fil-A; however, those chains that rely on franchising will likely slow down as their franchisees struggle to obtain financing.

One concern of many landlords in the region is the potential turnover from small shop tenants approaching the end of their initial lease terms. Many newer centers are currently enjoying rental rates that will be difficult to achieve in the near term if the spaces go dark. As option periods approach, one can expect to see some tenants engaging in renegotiating rent.

On a brighter note, the traditional and value priced grocery segment and the pharmacy segment remain strong. Kroger continues to post healthy sales, and continues to expand the size and number of its stores, and value-oriented grocer Aldi continues to grow as well. 

In general, Cincinnati’s retail real estate market today is healthy, largely due to relatively conservative retail growth and development in recent years, and Cincinnati’s stable and resilient economy.

— Scott Saddlemire and Dave Sheehy are senior vice presidents of Cincinnati-based Brandt Retail Group Inc.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.